Apr 7, 2017 | Investment Advice

International News (Issue 443) – April 7th, 2017

Notwithstanding today’s news of missile strikes against Syria, the biggest news in global investment markets this week was the release of minutes from the most recent U.S central bank meeting that pointed to a future in which the U.S Federal Reserve would be draining liquidity from the financial system.

This is a really big deal, probably the biggest issue for investment markets on a multi-year view, and so how it is enacted and when, is of utmost importance to investors.

The minutes pointed to a view that the central bank could look to start reducing its US$4.5trillion balance sheet towards the end of 2017 by allowing its huge bond market investments to mature, and hence have cash returned to the U.S Federal Reserve, thus exiting the financial system.

Remember that as part of so-called Quantitative Easing (QE), the Federal Reserve injected capital into the banking system by buying bond and mortgage-backed securities, forcing interest-rates down and generating liquidity for banks to lend.

Prior to QE, the Federal Reserve balance sheet was in the order of US$1trillion, so you can see just how big it has gotten under QE, and just how much it can contract over time.

Contracting the Fed balance sheet simply reduces the liquidity in the financial system, making capital scarcer, pushing yields higher and effectively making everything more expensive.

Since all assets are priced relative to the supposed ‘risk-free rate’, which is US government debt, this move has enormous magnitude for all investment markets.

We watch this space, and will aim to be ahead of the curve as this issue draws closer to impacting markets.

Thursday closing Values

 IndexChange%
U.S. S&P 5002357-11-0.5%
London’s FTSE7303-67-0.9%
Japan’s Nikkei18597-466-2.4%
Hang Seng24273-28-0.1%
China’s Shanghai3281+71+2.2%

 

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